This paper proposes a set of novel pricing factors for currency returns that are motivated by microstructure models. In so doing, we bring two strands of the exchange rate literature, namely market-microstructure and risk-based models, closer together. Our novel factors use order flow data to...

This paper proposes a set of novel pricing factors for currency returns that are motivated by microstructure models. In so doing, we bring two strands of the exchange rate literature, namely market-microstructure and risk-based models, closer together. Our novel factors use order flow data to...

Lustig et al. (2011) and Menkoff et al. (2012) have recently introduced some novel forex factors, the 'dollar risk factor'(DOL) and the 'carry trade factor'(HML) and show that these factors can price carry trade portfolios, in the cross-section. This new result is useful not just in the academic...

This paper proposes a set of novel pricing factors for currency returns that are motivated by microstructure models. In so doing, we bring two strands of the exchange rate literature, namely market-microstructure and risk-based models, closer together. Our novel factors use order flow data to...